Monday, 30 June 2014
I use the word “crank” because Randy uses the word SEVENTEEN times in his article in reference to the Chicago Plan. The simpletons who are impressed by pejorative words will presumably be as impressed by my use of them as Randy's use of them.
Anyway, Randy has just published an article at Economonitor attacking the full reserve / Chicago idea. I left a comment, but Randy (and indeed UKMC’s blog) often don’t publish comments that are critical of their articles. So I’m repeating a version of my criticism here.
Randy clearly doesn’t have much idea as to what full reserve banking consists of. His worst mistake is the claim that “In its modern dress, the proposal is to set up a centralized nongovernmental committee of experts to decide who gets the loans.”
Nowhere in any of the literature produced by advocates of full reserve does it say that. Indeed, the literature makes it perfectly clear that banks or similar private sector lending entities continue to decide who gets credit. And unlike Randy, I’ve actually read much of the relevant literature.
But let’s run thru his article from the start. He says (I’ve put his words in green):
“However, with a central bank that acts as a lender of last resort and with the treasury providing deposit insurance, our payments system is perfectly safe.”
Well of course! But lender of last resort and deposit insurance provided by taxpayers is a SUBSIDY of banking. And subsidies misallocate resources, as it explains in the introductory economics text books.
Incidentally, Walter Bagehot, writing 150 years ago did not approve of lender of last resort. See the last chapter of his book, “Lombard Street”.
Randy puts the total subsidy at $29 trillion of subsidised loans. That is ONE HELL OF A SUBSIDY. Is he seriously suggesting there is no misallocation of resources there?
Even crazier is the trillions of lost GDP and thousands of suicides that resulted from our clapped out banking system’s collapse five years ago.
The Postal System.
He then suggests that the Postal Saving System “does the payments system”. That amounts (far as I can see) to something very near to what advocates of full reserve / Chicago plan propose. That is, the latter propose that money transfers are only done using accounts that are 100% reserve, i.e. 100% backed by base money.
However, under his Postal Saving System proposal, everyone and every firm would need to open an account at the postal system. In contrast, under full reserve / Chicago system advocated by Positive Money, everyone would use their EXISTING BANK: much more convenient.
Thin air money.
Next, he says, “So we’ll eliminate that kind of banking, and just let narrow banks take in deposits and then buy safe treasuries. No more money creation out of thin air.”
Wrong. As the many advocates of full reserve / Chicago explain perfectly clearly, money is still created out of thin air: it’s just that that function is performed only by the central bank.
Sharing profits with borrowers.
Next: “The savers effectively share in the rewards or the losses incurred by the investors.” Correct. And what’s wrong with that? Savers have tens of trillions invested in stock exchanges where they “share in the rewards or the losses…”. Where’s the problem?
Next, Randay says “As an enterprise model, this is as old as the hills…” And what exactly is wrong with “old” ideas? The idea that two plus two makes four is an old idea.
I can’t be bothered reading any further.
That’s got us about half way thru Randy’s article. Given the large number of blunders, I’m not going to waste time reading any further right now. But I might do when time permits.
Sunday, 29 June 2014
Money creation by private or commercial banks takes place, first when a bank lends on money deposited at the bank. To illustrate, when $X is deposited and loaned on, both the borrower and the depositor then possess $X, thus $X has been turned into $2X.
Second, the commercial bank system can create money from thin air by lending without reference to whether it has enough deposits to “fund” that lending. That is banks simply credit borrowers with $Y, and that $Y is then deposited by whoever receives that money.
Under full reserve, all lending entities (whether they call themselves banks or not) have to be funded just by shareholders rather than by depositors, loans from the wholesale money market, bonds, etc.
Now money is a liability of a bank which is FIXED IN VALUE (inflation apart). That is, a dollar issued by a central bank or commercial bank is guaranteed to be worth very nearly the same 48 hours later. (Or to be more accurate, if inflation is anywhere near the 2% target, then that dollar’s value will not fall by more than about 0.01%)
But shares different. Shares rise and fall by significant amounts. Thus shares are never counted as part of a country’s money supply anywhere in the World. So if someone buys $Z of shares in a bank and the bank lends on $Z, no money creation takes place.
Thus enforcing full reserve (or at least the above aspect of full reserve) is easy compared to the Byzantine complexity that is Dodd-Frank and similar forms of recent and near useless bank regulation in other countries. All the authorities need do is keep an eye on the balance sheets of banks and make sure there aren’t any depositors there.
As to those who don’t want to “risk losing value”, i.e. those who want to lodge a given sum and ensure that they get exactly that sum back (in real terms) under full reserve, they’re catered for by entities or accounts where relevant sums are simply lodged at the central bank and/or (as advocated by Milton Friedman) some of that money is invested in short term government debt. Obviously that money (unlike shares) is totally safe, or as near totally safe as it is possible to get.
Bitcoin changes value.
An obvious exception to the idea that money is not money if it changes significantly in value is Bitcoin, which has changed value dramatically over recent years. My answer to that is that Bitcoin types of money will just never take off in a serious way until they’re guaranteed to keep their value. The vast majority of individuals and firms are not interested in seeing the contents of their bank accounts suddenly halve in value.
Moreover, if an when a Bitcoin type of money DOES become more or less fixed in value, it is then performing the same function as a central bank. And the idea that governments and central banks are going to stand for anyone intruding on their territory in any big way is just nonsense. Bitcoin has already been banned in Russia.
Anyone can create money?
The above method of curtailing private money creation might seem ineffective in that, as Minsky amongst others pointed out, anyone can create money. And indeed they can – in theory. For example INDIVIDUAL PEOPLE can try issuing IOUs. Unfortunately money is defined in economics dictionaries and economics text books as “anything widely accepted in payment for goods and services” or words to that effect. And the idea that an individual person can buy weekly groceries or a car by giving the shop or garage a bit of paper inscribed with the words “I owe the bearer of this bit of paper $A” is pure fantasy. Even small firms would have difficulties doing that.
Thus under full reserve, the authorities just wouldn’t need to keep an eye on individual people, small firms or even the smallest shadow banks. It’s only the larger firms and corporations that would need watching.
But that’s not to say that under full reserve there would ever be a 100% watertight ban on private money creation, especially since there is no sharp diving line between money and non-money. For example short term government debt is sometimes used in the world’s financial centres in lieu of money. Or you can try using bottles of whiskey as money if you want. The latter might work to a very limited extent in a few cases. (I actually pay a friend of mine who helps me with my PC with whiskey, strange to relate, because he won’t accept money. Computer geeks are normally a bit odd.)
Banks would try to circumvent the rules.
It’s a 100% certain that banks would try every trick in the book to circumvent the rules of full reserve. But then it’s a 100% certain they’ll try to circumvent ANY RULES or laws. Banks are quasi criminal organisations. J.P.Morgan was recently fined $20bn for various crimes. Yes, billion not million.
But to repeat, at least the rules of full reserve are simple. So to that extent they’re easy to enforce.
Portraying shares as money.
One trick that banks would try is to have just shareholders on the liability side of their balance sheets, while arranging for the value of those shares to remain constant, and allowing “depositor / investors” to draw checks on or do debit card transactions based on depositor / investors’ accounts at the bank.
Arranging for the value of shares to remain constant is relatively easy where depositors’ money is loaned out only to safe borrowers, e.g. mortgagors who have a minimum 20% or so equity stake in their homes.
However that ruse is easily dealt with. First it can be made illegal to draw checks on a stake in a bank which consists nominally of shares. Indeed under the full reserve system advocated by Positive Money, checks and plastic card transactions can only be funded by the above mentioned totally safe accounts.
Second, it would be easy to stipulate that any literature or web sites relating to bank shares make it abundantly clear that there is no FDIC type insurance for the relevant “money”. Indeed that sort of stipulation has been in force in the UK for years in that ALL LITERATURE relating to shares and mutual funds (“unit trusts” in the UK) says something in bold print about the possibility of the relevant stake possibly falling in value. (That applies of course just to non-money market mutual funds. Money market mutual funds (assuming they invest in nothing more risky than short term government debt, would be classified as “totally safe” under full reserve.))
The UK’s National Savings and Investments.
Anyone who thinks there is a problem in running totally safe accounts should ponder the fact that accounts of this sort already exist in the UK: supplied by “National Savings and Investments”. And doubtless some other countries have something similar. NSI is a government run savings bank which invests only in government debt. It does not issue check books or plastic cards, but it DOES TRANSFER depositors’ money within 24 hours to any other bank account the depositor wants. And of course it’s a very small step from that to a system which also issues check books and debit cards.
Saturday, 28 June 2014
Friday, 27 June 2014
I like it, plus I think I recognise the voice in it: I think it's an Oxbridge physicist who has authored stuff for PM before: Michael Reiss. This is another PM video which Reiss definitely produced.
But I'm only GUESSING about the voices in those videos - be warned.
P.S. (29th June). Since the above, they're produced another video. I suspect I'll disagree with some aspects of it, but will have a look.
The Federal Deposit Insurance Corporation is a government run, self-funding insurance system for small banks in the US.
Most of us want a banking system that offers depositors total security, even when a bank goes bust. FDIC is one method of achieving that, and another is full reserve banking. Or to be more accurate, what full reserve offers depositors is two types of account. One offers total security, but that is achieved by doing nothing the faintest bit risky with the money involved (the money is simply lodged at the central bank and/ or invested in short term government debt). And the second type of account involves lending on money in a more risky manner (e.g. to mortgagors and businesses). But in that case, depositors carry the full cost when those loans fail. In effect, those depositors are bank shareholders.
So which is better: FDIC or full reserve?
Like full reserve, FDIC involves depositors in paying pretty much the full costs of what they engage in, or put another way it involves depositors carrying the cost of any losses made by their bank: they just pay via an insurance premium.
It can well be argued that under both systems, part of the cost is passed on to borrowers. But let’s assume to keep things simple that the PROPORTION of costs passed on the borrowers is the same in both cases (full reserve and FDIC).
Bank failure under FDIC.
Under FDIC, when a bank’s assets fall to some proportion of it’s liabilities (90%, 80%, or whatever), the bank is closed down, FDIC grabs and sells off the assets and reimburses depositors from both the proceeds of sale of those assets plus the fund of money that FDIC has built up as a result of charging insurance premiums.
As to bank shareholders, they of course take a hair cut: maybe a 100% haircut – that is, they’re wiped out.
Under full reserve, there’s no need for FDIC because a bank or lending entity funded just by shareholders cannot suddenly go bust (though it can decline due to bad management over a period of time). Or as George Selgin put it in his book “The Theory of Free Banking”, “For a balance sheet without debt liabilities, insolvency is ruled out”.
The apparent advantage of FDIC.
So what’s the advantage of the conventional or existing system under which banks are funded predominantly by depositors or similar types of short term creditors, with shareholders providing only a small proportion of the bank’s funds and with FDIC acting as backstop?
Well the advantage seems to be that commercial banks can create a form of money: undoubtedly a useful service. That is, banks SPECIFICALLY make that asset/liability liquid so as to turn it into a form of money. Plus the VALUE of each unit of those liabilities is fixed in value (inflation apart). That is, you can guarantee that a dollar or pound Sterling (unlike shares) won’t drop in value by more than about 0.01% in the next 48 hours.
And that “more or less fixed in value” characteristic is near essential if the relevant liability is to be classified as money. Reason is that one of the essential ingredients of money, as per text book definition of the word, is that money is a “measure of value”. And just as you cannot measure the length of something with an elastic tape measure, you cannot measure the value of anything with a form of money whose OWN VALUE keeps changing.
An obvious exception to the latter point comes with Bitcoin, which DOES CHANGE in value. But Bitcoin will never become a serious competitor for state issued money until it becomes fixed in value.
So to summarise so far, the big advantage of commercial banks backed by FDIC seems to be that they can issue a form of money.
Central banks also issue money!
But CENTRAL BANKS can just as easily create or supply the economy with a form of money and at practically no real cost. Indeed they already do produce a portion of the money supply. So the latter apparent merit in letting commercial banks have traditional depositors backed by FDIC collapses!
Put another way, what’s the point in a system that CLOSES DOWN banks when they make silly loans, if there is a system available (i.e. full reserve) under which banks DO NOT have to close down when they make silly loans? There IS NO point!
A flaw in Positive Money’s system.
Strangely enough, while PM advocates full reserve, the PARTICULAR FORM of full reserve advocated by PM actually retains the latter “close down” defect. That is, their system is not a PURE full reserve system, and for the following reasons.
Under PM’s system, there is no FDIC, and depositors who opt to have their money loaned on (i.e. put at risk) are guaranteed £X back for every £X they deposit until such time as the bank has clearly failed. And at that point, depositors may have to accept a hair cut.
In contrast, under Laurence Kotlikoff’s full reserve system, those who want their money loaned on or put at risk buy into a mutual fund (unit trust in the UK) of their choice. That way, it’s near impossible for lending entities (i.e. mutual funds) to go bust. And for that reason, I prefer Kotlikoff’s system.
Indeed, another strange characteristic of the PM system is thus. Say a bank’s assets fall to the point where it is closed down, which is where its assets have fallen to say Y% of its liabilities. That means that depositors will get Y% of their money back, roughly speaking. But in the same scenario under the Kotlikoff system, those depositor / investors would see their stake in the bank / mutual fund drop to Y% of its initial value. So under both systems, depositors end up with Y% of their original stake, but under the PM the bank is closed down, whereas under Kotlikoff's system it soldiers on.
Ergo . . . the PM system, you could argue, involves closing down banks for absolutely no reason.
Taxpayer funded bank insurance.
In contrast to FDIC, which as pointed out above is self-funding, an obvious alternative is to have taxpayers stand behind banks or “fund bank insurance” if you like. The latter system applies to large banks in the US (the so called “Too Big to Fail” subsidy), and all banks in the UK. Or to be more accurate, there’s a sort of TBTF subsidy in the US, but it seems the US government is prepared to let the occasional large bank fail (i.e Lehmans) pour encourager les autres.
However, TBTF is clearly even worse than FDIC, and indeed the declared objective of those trying to bring better bank regulation, like the Vickers commission in the UK, is to dispose of all bank subsidies, an objective they’ve completely failed to achieve .
Indeed, the worthies trying to dispose of bank subsidies don’t seem to have the faintest idea as to how to do it.
Thursday, 26 June 2014
I’m amazed by this passage from a recent post by Scott: “Since 2008, the UK has run extremely large budget deficits, bigger than the US as a share of GDP. Everyone agrees these are too large, and need to be reduced. But Keynesians have argued that austerity should be very gradual, to avoid derailing the recovery. That’s a fair argument…”.
That’s in stark contrast to his previous pronouncements to the effect that fiscal stimulus is a waste of time, Keynsians are deluded, MMT (which incorporates a fair amount of fiscal in the type of stimulus it advocates) is nonsense, etc etc.
I’m now baffled as to what Scott’s “Market Monetarism” actually consists of. Assistance appreciated. However, I suspect he has changed his mind, but hasn’t realized it or doesn’t want to admit it.